Kennouth Investments 7/6/14
Stocks on the Dip You Need to Consider: GWW, CHK
With
the market making all-time highs seemingly at least once a week so far this
year, how is anyone supposed to find any value?
Momentum stocks aren’t anymore settling, with stocks like TSLA, SUNE,
NFLX, and AMZN also at or near all-time highs, and the TTM p/e ratio of the
Russell 2000, as of June, 27, is 84.41!
I’m not saying there isn’t any multiple expansion, but a typical
contrarian could argue, quite easily, that the path of least resistance is on
the sell side. Remarkably, there are a
couple select stocks that are still well below their 52-week highs.
W.W. Grainger
(GWW)
p/e ratio: 22.08x
Dividend: 2.99%
It’s
well known that markets over react. Such
was the case when W.W. Grainger released their latest sales results. Nearly every region Grainger operates in
reported decent to good numbers for the month of May, except for Canada, which
sent the stock tumbling 3.3% in one day and an additional 3.4% since. In order to find out the reasoning behind
this move down, let’s look at some other numbers:
§ 6% increase in
sales for May YoY, exceeding 5% growth from last year.
§ 8% rise in U.S. daily sales.
§ 10 – 40 basis point expectation of expansion in
operating margin,
§ $115 million is expected to be spent this year, DOWN
$15 million dollars from last year.
Along
with the growth Grainger experienced last year, the company hired 180 new sales
representatives, and two weeks ago they purchased 96 acres in New Jersey to
build a new distribution center. The
headwinds faced in Canada were mainly due to circumstances outside of
Grainger’s control. The Canadian economy
weakness is due to lower commodity prices and a reduction of Canadian exports,
and the decline in sales in that region was accentuated by a 2% decline from
currency translation. Since the decline
in the share price, Zacks.com upgraded the stock to a Hold from Sell; citing
investors should wait for a better entry point for accumulation. Considering the stock is down another percent
since the upgrade, now might be a good time to be buying. If it can maintain earnings growth of five
percent, and the share price moves three times earnings, that means the stock
should see a rise of about twelve to fifteen percent by year end, especially
since GWW is essentially unchanged year to date.1
Chesapeake
Energy (CHK)
p/e ratio: 24.63x
Dividend: 1.20%
Chesapeake Energy is one of the country’s largest
exploration and production companies of natural gas and oil.2 And while the whole energy sector has taken a
hit over the past two weeks, as reflected by the 2.7% decline in the SPDR oil
and gas ETF, XOP, since June 23, there’s one reason in particular why you
should be looking at CHK above the others in its peer group: Seventy Seven
Energy (SSE). What CHK has done with
Seventy Seven Energy is one of the most favored actions investors and traders
alike look for in their search for outperforming stocks. On July 2, Chesapeake split its gas and
oilfield services into two separate companies, with Chesapeake retaining control
over natural gas operations, and Seventy Seven taking over the oilfield
services.
For
those who are new to investing, here’s why this is important. Companies start spin-off companies in the
expectation of having a better ability to focus on one particular direction for
both the parent and child companies, it reduces costs and debts, thereby
increasing margins and profits, and it increases the market value of the
company’s assets.3
For every fourteen shares
Chesapeake Energy shareholders own, they will now receive one share of
SSE. Win, win, win. Furthermore, with the Obama administration
allowing only Pioneer Natural Resources Company (PXD) and Enterprise Products
LP (EPD) to export the ultralight oil known as condensate,4 Chesapeake Energy should take less of a hit as
money managers and retail investors move their money from the other energy
stocks to these two companies, PXD and EPD.
This active legislation on permitting oil exports once again is a
secular trend investors must put
their money towards; especially to the point, the growth in alternative energy
in the utility and transportation industries will only naturally take America
off of its dependence on oil. These are
not only trends we have to recognize, but trends from which to make a profit. This
isn’t the first time in recognizing this trend, because Chesapeake Energy has
as well. Two years ago, the company
announced a new initiative, called “A Declaration of Energy Independence.” The plan’s primary objective, as reported by
WyoFile and the Rural West Initiative at the Bill Lane Center for the American
West, is to drive America toward energy independence, and back in 2011,
declared the country’s “’$400 billion a year’ in foreign oil imports is ‘fiscally
insane.’”5 Since then, America hasn’t made much, but some,
progress in bringing that number down 5% to about $380 billion as of 2013.6 Lastly,
Chesapeake Energy, as a part of this initiative, invested $1 billion to
establish a fund in the aims of converting transportation fleets from gasoline
to compressed natural gas. This is just
one example of when free market capitalism is superior to every other method of
state-owned economic policy; the market is able to move, react, or in this case
(which is the best case), be proactive faster than the state against any
policies which might stand in its way. CHK stock currently stands at $29.50/share,
which is only 1.4% below its recent high. Taken into more consideration, that’s
still significantly lower than its 5-year high of $32.34, while in that
duration has been forming a healthy cup-and-handle formation. CHK needs to experience a %118 increase before
it reaches its all-time high of $64.42.
If you still need more assurance, I don’t think seventy-five thousand
shares would have been bought in insider trading during the most recent quarter
if the insiders didn’t have a good feeling about where the stock was going, which
is exactly where you need to be looking: up.7
1.
Zacks
Equity Research, “Grainger Upgraded to Hold On Modest Improvement in Sales,”
Zacks Analyst Blog, accessed July 2, 2014, http://www.zacks.com/stock/news/138269/grainger-upgraded-to-hold-on-modest-improvement-in-sales
2.
Glickman, S. “Chesapeake
Energy Corp.” Chesapeake Energy Corp; S&P Capital IQ Mcgraw Hill Financial.
Accessed July 6, 2014. https://research.ameritrade.com/grid/wwws/common/reports/report.asp?id=10072&documentTag=16516710&vtag=5S5LJP8FKTAVD0APG9R5ND9RUT
3.
Zacks Equity Research,
“Chesapeake Closes Spin-off; Seventy Seven Energy Debuts,” Zacks Analyst Blog,
accessed July 6, 2014, http://www.zacks.com/stock/news/138872/chesapeake-closes-spin-off-seventy-seven-energy-debuts
5.
Bleizeffer,
Dustin. “Drilling to Independence; Can the West save us from foreign oil
imports?” WyoFile. WyoFile and the Rural West Initiative at the Bill Lane
Center for the American West. Accessed July 6, 2014. http://wyofile.com/dustin/drilling-to-energy-independence-can-the-west-save-us-from-foreign-oil-imports/
6.
Fuel Freedom
Foundation. “Oil Economics.” Fuel Freedom. Fuel Freedom Foundation. Accessed July
6, 2014. http://www.fuelfreedom.org/the-real-foreign-oil-problem/oil-economics/
7.
Thomson Reuters,
Vickers Stock Research. “Chesapeake Energy Corp.-Fundamentals.” Chesapeake
Energy Corp. TD Ameritrade. Accessed July 6, 2014. https://invest.ameritrade.com/grid/p/site#r=jPage/https://research.ameritrade.com/grid/wwws/stocks/fundamentals/fundamentals.asp?symbol=CHK
Disclaimer: Trading stocks has extremely high risks, and should not be
taken to lightly without a thorough understanding. This is written from a
purely commentary point of view and is not meant to suggest buying, selling, or
holding a stock. All traders must do their own research prior to
investing. We (Kennouth Investments, Research, and Learning) are
unaffiliated with GWW, we’re long CHK, and can't be held responsible for
any losses that may occur. Invest at your own risk.
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